Purchasing must become supply selling

Purchasing must become supply selling: how managers can guard against materials disruptions by formulating a strategy for supply (by Peter Kraljic, Harvard Business Review, September 1983)
Summarised By Ellen Croux and Deva Rangarajan, Vlerick Sales Center

Article At a Glance:
This is an evergreen article mainly used by professionals in procurement and supply chain to classify their suppliers and then use this classification to manage the relationship with their suppliers. Interestingly the author argues for procurement professionals to not treat all of their suppliers the same way, but to go for a more nuanced way of differentiating between the different types of suppliers. Doing this would necessitate the procurement professionals to move from an operational, cost-driven mindset to a more strategic, risk reduction mindset with specific set of suppliers. The author goes on to identify four steps that procurement professionals need to consider to take on a more strategic role within their organization.

Introduction
In many companies purchasing is a routine activity, it was formed over 20 years ago in an era of relative stability and hasn’t changed much over time. Companies ignore the fact that the stable business environment, in which many organizations are used to operate, no longer exists, patterns of supply and demand can literally change overnight. A company has to acknowledge and adjust to worldwide economic and environmental changes in purchasing to remain competitive. Factors like threats of resource depletion, raw materials scarcity, political turbulence, government intervention in supply markets and accelerating technological changes, make companies wonder how to guard themselves against disastrous supply interruptions and what capabilities they will need to sustain a competitive advantage. This article helps top management to identify weaknesses in their supply and offers a comprehensive strategy to manage supply.

There is a necessity for a total change of perspective: from an operation function (purchasing)to a strategic one (supply management) to use recent developments for own advantage. Companies will have to adapt to global sourcing to ensure long-term availability of critical input at competitive cost, which entails risks and complexities on an unprecedented scale. Whenever a manufacturer must procure a volume of critical items competitively under complex conditions, supply management is relevant.

Diagnosing the case
A company’s decision which supply strategy to pursue depends on 2 factors: the strategic importance of purchasing in terms of the value added and the complexity of the supply market gauged by supply scarcity, pace of technology or raw materials substitution, entry barriers, logistic cost or complexity and monopoly or oligopoly conditions.

Shaping the supply strategy: 4 phases Phase 1: Classification of all purchased materials or components
Categorization, based on the profit impact of a given supply item and the supply risk as category criteria, permits a more differentiated and better focused approach to the analysis of supply market data. Changes in supply or demand patterns can influence the categorization and regular updating of the portfolio classification is necessary. 4 different categories of items can be distinguished.

Phase 2: Market analysis The company analyses its own supply needs and the ability to get the supply terms it wants and weights them against the bargaining power of its suppliers. The relative importance of criteria may vary over time and in between different industries. Contrasting purchasing portfolio evaluation criteria:

Phase 3: Strategic Positioning
The company positions the materials identified as strategic in phase 1 in the purchasing portfolio matrix. This matrix plots company buying strength against the strength of the supply market. Usually a company will find itself in different roles with respect to different items and suppliers. The position in the matrix helps identify areas of opportunity or vulnerability and supply risks and helps derive basic strategies. The aggressive strategy (exploit) in which the company should use strengths to achieve favourable pricing and contract agreements. However beware of jeopardizing long-term supplier relationships or provoke aggressive counter reactions of competitors. The intermediate strategy (Balance) and the defensive strategy (diversify) in which you should start looking for material substitutes or new suppliers, perform more market research, invest in better supplier relations, consider backward integration.

Phase 4: Action Plans

Strengthening the organization
Few companies can allow purchasing to be managed in isolation from the other elements of their overall business systems. Greater integration, stronger cross-functional relations and more top-management involvement are all necessary. Concrete changes in the organization will be required to establish effective organizational relations, provide adequate systems support and meet new staff and skills requirements.

Effective relations: The purchasing function should reflect the overall corporate setup. A choice should be made between centralization which entails higher bargaining power but less flexibility or decentralization. Volume and concentration of purchased goods as well as the corporation’s structure and complexity will determine the purchasing’s position in the corporate structure. Different corporate philosophies lead to different solutions. The purchasing department’s structure should reflect supply product market affinities and permit staff with specialized competence to take the lead in working out strategies for specific items.

Systems support: The purchasing department often receives information on the company’s business plans and objectives, but lack information on a 3-6 month time horizon, necessary for strategic supply management. Companies will only realize benefits if they effectively use tailormade systems, which must foster consistent, cross-functional information flows and demands.

Staff and skills requirements: There is potential leverage to be obtained through improved purchasing staff and skills. However hasty moves in this area can backfire, especially if they disrupt close relationships with suppliers. Employee resistance to the implementation of new systems should be minimized. Progress toward effective supply management can only be gradual, and the company will have to surmount many obstacles along the way, but the rewards are well worth the effort.

Vlerick Food for Thought for Sales Executives

Understanding the maturity of your customer’s procurement/supply chain department is going to be critical for any salesperson to understand a) what is the value that needs to be proposed to the customer, b) how lengthy the sales cycle is likely to be, c) how complex the sale is going to be, and d) more importantly what is the viability of the customer in terms of developing a long term relationship with the customer.

From a sales manager’s perspective, understanding how your organization is viewed by your customer should help a) better formulate an accurate go-to-market process including choosing between e-commerce, third party providers for non-strategic customers and using your own field sales for more strategic customers, b) selecting and coaching your sales force to have strategic conversations with the right customers, c) understanding the impact of the sales cycle on setting the right KPI’s, etc.